Greater stability in the airline industry may give a boost to inbound tourism. Photo: AFR

Higher airfares

The biggest cost of the alliance is that, compared with a world in which there is no alliance, there will be fewer seats in the market. Fewer seats invariably lead to higher airfares, and higher airfares reduce consumer welfare. In general, when there are 10 per cent fewer seats in the market, airfares rise by between 5 per cent and 7 per cent.

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While Qantas has argued that the alliance will free up some fleet units for greater use on other routes and this may add to capacity on those routes, it is not likely to exceed the capacity it would have added to the market without the alliance.

Reduced competition

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The type of alliance that has been accepted by the ACCC also reduces the number of competitors by one. Again, this has the effect of increasing airfares. There is, therefore, an airfare double whammy – fewer competitors and fewer seats, both of which result in higher airfares. This is a problem both for the European and trans-Tasman routes.

I know I won't be popular with passengers by saying this, but consumers have been enjoying some exceptional deals with European and trans-Tasman flights for years, to the detriment of the earnings of carriers. It is about time that the benefits pendulum swung back to airlines.

And I don't think the airfare increase will be material. The type of alliance in which Qantas and Emirates is involved will reduce the number of competitors by one but from a relatively high base. On the European and trans-Tasman routes, there are a large number of potential competitors – often up to eight. When the number of competitors falls from eight to seven, the impact on airfares is significantly lower than the movement from three to two or from two to one.

It is also the case that the alliance may also reduce the air passenger duty taxes Qantas pays to the British Treasury which, if passed through by Qantas, may mitigate the increase in airfares.

Supply stability

Returning some earnings joy back to international carriers may also create greater stability on the supply side of the industry. A more stable aviation supply environment is good for all stakeholders in the industry.

In the unstable environment that has characterised the industry for the past two decades, we have seen such carriers as Air France, Lufthansa, Swiss Air, Olympus Air, Lauda Air and Alitalia leave the Europe-to-Australian route. Over a long horizon this isn't good for airlines, passengers and inbound tourism.

Product benefits

The ACCC has clearly placed a significant weight on the product benefits of the alliance. The most significant of these is the greater access Australian Qantas passengers will have to Europe.

At present, Qantas flies directly to just two European ports, London Heathrow and Frankfurt. If Qantas passengers want to fly to other points in Europe, they have to transit in London Heathrow and Frankfurt prior to boarding another flight, on a different carrier, to their destinations.

This need for a two-stop flight adds enormously to the flying time. And for many people flying Qantas, which is top heavy with corporate and business traffic, time is considerable money.

Under the alliance, and with the help of Emirates, there will be a direct flight to 33 points in Europe. This will considerably slash the flying time for passengers.

According to global airline surveys, the Emirates product tends to rank higher across most categories than the Qantas one. Many Qantas passengers will experience the Emirates product for the first time and will no doubt benefit from it.

Trans-Tasman

The net benefit of the alliance is clearly not as material on the trans-Tasman route because the product benefits are weaker.

Indeed, it could be argued that the welfare-decreasing effect of higher airfares is likely to outweigh the welfare-increasing effect of product improvement.

Risk to Qantas

The only considerable risk to the Qantas group of the alliance is that about 50 per cent of passengers travelling between Europe and Australia like a stopover in Asia to break up the journey. Asia is the perfect destination for this (more so Hong Kong and Bangkok than Singapore) because it is about halfway to Europe.

Dubai is not as effective a stopover point because the first leg (Australia to Dubai) is about five to six hours longer than Australia to Asia. For families this prolonged period in the air can be a nightmare.

It is also likely that some passengers just prefer a stopover in Asia compared with the Middle East – but that theory it yet to be tested in any scientific way.

Tony Webber was Qantas Group chief economist between 2004 and 2011. He is now managing director of Webber Quantitative Consulting and Associate Professor at the University of Sydney Business School.